Falling Oil Prices on Horizon as China Moves into Next Phase of Covid Crisis

Since the late 1990s, China has been the biggest beast in global oil markets, generating annual double-digit economic growth during the many years it used to drive demand for oil and other commodities, and then high-single-digit growth in the years after that. . In 2017, China’s high economic growth rate still allowed it to overtake the United States the largest annual total crude oil importer in the world, in 2013 it became the world’s largest net importer of total oil and other liquid fuels. From 1992 to 1998, China’s annual economic growth rate was mostly between 10 and 15 percent; Between 8 and 10 percent in 1998-2004; between 10-15 percent again in 2004-2010; It is 6-10 percent in 2010-2016, and 5-7 percent in 2016-2022. In this regard, no one knows exactly where it will go, except that it will go down, and the main reason why it will go down is because of the country’s handling of Covid, especially the “zero-Covid” policy. However, any choice for China about where this policy goes from here—whether to stick with it or relax it further—carries huge risks for the country and its leader, Xi Jinping, with whom the policy is personally associated. . Whatever choice Xi makes, it is almost certain that it will result in a long-term decline in oil prices. While this may be bad for oil companies and net oil producers, it will be good for several major advanced economies and their citizens who have seen oil prices skyrocket over the past few months, playing a key role in the destruction of their savings, pensions and money. quality of life. Related: US Oil, Gas Drilling Activity Going Nowhere

Briefly, China’s zero-Covid policy is based on ultra-strict lockdowns imposed in all areas, including major cities, immediately after a relatively small number of Covid-19 cases are identified. December 2021 saw an upgrade to the zero Covid strategy, which included the idea of ​​”dynamic clearing”, which gave local governments more flexibility in imposing restrictions and allowed the daily increase in symptomatic cases to reach around 200 on a national basis. On November 11, the Chinese government announced this 20 small changes The zero-Covid policy requires only one negative PCR test within 48 hours of boarding two flights to China, including travelers from overseas. Another was that foreign travelers would only have to be quarantined for eight days, rather than 10 days, and another was that ‘close contacts’ of people inside China with Covid-19 carriers would no longer need to be quarantined. The new guidelines also banned mass testing in an area ‘unless it is clear how infections are spreading’.

Despite this easing of regulations, Chinese President Xi is currently a a wave of public protest against still-tight Covid-19-related restrictions across the country, a severity not seen since the mid-1980s Massacre in Tiananmen Square in 1989. The latest round of these protests began after at least 10 people burned to death in an apartment fire in Urumqi, the capital of eastern Xinjiang province, with many blaming Covid lockdown rules for delaying any response from emergency services. According to several live television reports at the time, the protests spread to several major cities, including Shanghai and Beijing, with protesters chanting “Get down, Xi Jinping! Go, Communist Party!”. It seems that the protests of the 1980s stemmed largely from a breakdown in understanding between the people and their government—the former content to go along with the latter’s controlled regime. provided they are given prosperity – and so are the current protests. Prosperity requires economic growth, and the more the better for the government, and that’s its problem right now.

President Xi is caught between a metaphorical rock and a hard place. On the one hand, if it sticks to anything close to zero Covid restrictions — at this point, any meaningful restrictions at all — then China’s economic development will continue to deteriorate. In addition, the scale and scope of protests against him and his regime may increase. On the other hand, if it meaningfully relaxes China’s Covid-19 control measures, then it is highly likely that many Chinese people will die, resulting in the same dire scenario that China would face if it sticks to its strict control policies. For Covid-19.

The reason for the high number of deaths resulting from any meaningful lifting of controls related to Covid-19 is that China still lacks an effective vaccine against the disease or any of its variants, despite offers from all major vaccine-producing countries. supplies available to him. China also lacks effective post-infection antiviral drugs, and despite offers from a number of Western countries to provide it with such antiviral and post-infection treatments, it still refuses to buy such products from foreign suppliers. Because of China’s initial response to the outbreak of Covid-19 in 2019 – drastic lockdowns in all regions – there are still many people in the country without any vaccination against any variant of the disease, even China’s own vaccine (CoronaVac), and it is becoming increasingly common in intensive care units. (ICU) critical shortage.

“China has 263 million people over the age of 60 and 35 million over the age of 80, and the vulnerability of the elderly to severe cases of Covid-19 is well known,” said Rory Green, chief China economist for TS Lombard. London said exclusively OilPrice.com last week. “Only 66 percent of those over 80 have been vaccinated and only 40 percent have been vaccinated three times, and we know from a detailed medical analysis of the Hong Kong outbreak that the CoronaVac injection has equivalent efficacy to mRNA vaccines after only three doses. Making 37 million vulnerable to the widespread Covid epidemic,” he said. After vaccines, the main issue in fighting the Covid-19 epidemic is treating those seriously affected by the disease, and that means ICU capacity in hospitals, but China has a big problem here too. “Various studies put the number of ICUs in China between 3 and 6 per 100,000 people — compared to 2.3 in India and 34.7 in the United States,” Green tells OilPrice.com. “What national-level analysis misses is regional variation in ICU coverage: Most ICUs in China are in wealthy eastern provinces with higher vaccination rates and better demographics, and local estimates are influenced by city-level demographics and medical capacity, the most vulnerable city—Yunnan.” highlights that Lijiang’s province will need a 6,000 percent increase in ICU capacity to adequately address the Omicron outbreak,” he said.

So how bad can things get for China? Data from February 2022 in Hong Kong is likely to offer the most relevant comparison, Green believes. “Back to the Chinese CDC [Center for Disease Control] Using the February 2022 Hong Kong outbreak as a baseline for community spread and case severity, city-level health care micro-estimates estimate that only 7.3 percent of China’s population lives in cities with sufficient ICU capacity. another 92.7 percent live in areas where ICU resources would be completely overwhelmed by the epidemic,” he said. “For a relatively unvaccinated population, the shock could be significant: based on Hong Kong’s death rate, China could face 50,000 deaths per day at the height of an uncontrolled epidemic,” he said. Economically, then: “In short, China is well and truly stuck and we think real GDP as measured by TS Lombard will be around 1.6 per cent year-on-year this year,” concludes Green.

The elimination of much of the economic potential behind China’s huge bid in global oil markets would mean a softer real demand backdrop for oil prices, especially with any reduction in the Russia-Ukraine War prize. This award started in September last year when the market started buying oil based on smart players Observations of US intelligence Unusual Russian military actions on the Ukrainian border after the end of joint Russian-Belarusian military exercises. Before that, the price of oil was continuously around USD 65 per barrel of Brent oil. This level reflected the equilibrium price, underpinning the already evident weak demand from China. As the Russia-Ukraine war premium diminishes as Europe continues to replace energy from Russia with energy from other sources, this $65/bbl level is likely to be the base point for oil prices from then on.

By Simon Watkins for Oilprice.com

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